Understanding the Stages of Retail

When Ron Johnson took over the helm at J. C. Penney in November 2011 with a mandate to turn the ailing retailer around, all eyes were on him. He had an amazing legacy: Senior VP of Retail Operations at Apple pioneering the concept of the Apple Retail stores and the Genius Bar. Before that, he was the VP of merchandising for Target (or “Tar-jay”).

And indeed he had a very innovative strategy for J. C. Penney: get rid of nonstop price promotions and introduce boutique “stores within the store.” Surrounding these shops would be wide aisles that Johnson called “streets” that would feature coffee and ice cream bars and places to surf the internet, and all of this would surround a town square for in-store activities and events. Much has been written about the faulty implementation of this strategy. Consumers failed to understand the confusing new pricing, the new stores could not be constructed quickly enough, and sales and stock price declined precipitously. Indeed, more than a year later, there have been numerous articles suggesting that Ron Johnson should be fired.

As J. C. Penney’s sales declined, Costco’s sales increased. Recently, Costco reported a 39% jump in quarterly earnings. Costco’s CFO, Richard Galanti stated, “People are eating in more and looking for fresh food, which, along with [our] low gas prices, is what are driving people into our stores more often. Then, once they are inside, they pick up a sweater or a new television.”

Both this success and the failure stem from the same insight about consumer behavior. Consumers do not just wake up and make a purchase. The purchase process is staged. First, consumers recognize a need, then they search for information about products that might solve that need, they create a consideration set, and finally make a choice. That the purchase process is multi-staged is something we’ve known for years, but in this new age of radical change in retailing and hyper global competition, it is easy to forget the basics. While Costco understood food and gas were critical needs driving people to the store, Ron Johnson forgot that it was the prospect of a sale or a steep discount that drove J. C. Penney’s customers to the store.

Similar successes and failures can be observed at the information search stage of the purchase process. Best Buy learned this the hard way. Best Buy sales were hurt significantly by consumers who used their big box stores as a showroom to learn about various products that were then purchased for a lower price using the Amazon.com app. Best Buy has recently instituted a “lowest price guarantee” strategy to try and thwart this debilitating behavior.

On the other hand, Warby Parker used the need to search for information about their product — eye glasses — as a strategy to build loyalty. Warby founders started their business because they recognized that eyeglasses that almost always sold in offline retail outlets were marked up 10-20 times from manufacture to sale. If consumers would buy eyeglasses online directly from them, Warby could eliminate much of the retail markup. But the problem was that purchasing eye glasses can be a daunting task, and consumers search for information in the eyeglasses store with the help of sales experts to guide them. To solve this need for social interaction, Warby invented the “home try-on” concept: their customers can try up to five frames at home for free for five days. This eliminates the need for the in-store expert; consumers can ask their friends, wear their glasses around, or post pictures on Facebook and get reactions. In this case, the information search stage was used as a differential advantage to build allegiance to Warby.

And the purchase/use stage can also be reimagined. There are multiple new businesses that have recognized that consumers sometimes would rather rent a product than buy it. Zipcar reimagined having a car in the city. Why buy one if it is easy to rent one for several hours, just when you need it. Rent the Runway figured this out with special clothing. Since customers were only wearing the dresses once, renting them made sense. Not a new concept — renting formal wear is an idea that has been here for awhile — but a new execution. And the realization of how consumers want to purchase a product — i.e., temporarily rather than permanently — is building sales at Rent the Runway and destroying sales at traditional department stores.

The bottom line is that understanding that the decision process is staged is fundamental to understanding how people buy. These stages can be executed by different people, at different times, and at different channels. And understanding consumer buying behavior is fundamental to generating sales. It’s an easy concept, but it’s shocking how easy it is to forget.

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